What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-10 compared with 2023-05-11 · 224 added, 238 removed, 283 unchanged (62% of the section changed)

22 unchanged sentences

include, without limitation:

● current and future economic

and financial market conditions, either nationally or in the states in which we do business, including conditions such as inflation, recession,

unemployment, changes in interest rates, fiscal and monetary policy, an increasing federal government budget deficit, the failure of the

federal government to raise the federal debt ceiling and/or possible future U.S.

government shutdowns over budget disagreements, slowing

gross domestic product, tariffs, a U.S.

withdrawal from or significant renegotiation of trade agreements, trade wars, and other factors

beyond our control, any of which may result in adverse impacts on our deposit levels and composition, the quality of investment securities

available for purchase, demand for loans, the ability of our borrowers to repay their loans, and the value of the collateral securing

loans made by us;

● recent and future bank

failures may reduce customer confidence, affect sources of funding and liquidity, increase regulatory requirements and costs, adversely

affect financial markets and/or have a negative reputational ramification for the banking industry as a whole, any of which could adversely

affect the Company’s business, earnings and financial condition;

● instability in global economic

conditions and geopolitical matters (including the ongoing conflict in Ukraine), and volatility in financial markets, which could have

a material adverse effect on our results of operations and financial condition;

● changes in interest rates

resulting from national and local economic conditions and the policies of regulatory authorities, including monetary policies of the Board

of Governors of the Federal Reserve System, which may adversely affect interest rates, interest margins, loan demand and interest rate

● the impacts and duration of the continuing recovery from the COVID-19 pandemic

and its impacts on national, regional and local economies, supply chains, labor markets and on our customers, counterparties, employees

and third-party service providers;

● the volatility of mortgage

banking income, whether due to interest rates, demand, the fair value of mortgage loans, or other factors;

● factors that can impact

the performance of our loan portfolio, including changes in real estate values and liquidity in our primary market areas, the financial

health of our borrowers and the success of construction projects that we finance;

and future economic and financial market conditions, either nationally or in the states in which we do business, including conditions

such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy, an increasing federal government budget

deficit, the failure of the federal government to raise the federal debt ceiling and/or possible future U.S.

government shutdowns over

budget disagreements, slowing gross domestic product, tariffs, a U.S.

withdrawal from or significant renegotiation of trade agreements,

trade wars, and other factors beyond our control, any of which may result in adverse impacts on our deposit levels and composition, the

quality of investment securities available for purchase, demand for loans, the ability of our borrowers to repay their loans, and the

value of the collateral securing loans made by us;

and future bank failures may reduce customer confidence, affect sources of funding and liquidity, increase regulatory requirements and

costs, adversely affect financial markets and/or have a negative reputational ramification for the banking industry as a whole, any of

which could adversely affect the Company’s business, earnings and financial condition;

● instability

in global economic conditions and geopolitical matters (including the ongoing conflict in Ukraine), and volatility in financial markets,

which could have a material adverse effect on our results of operations and financial condition;

in interest rates resulting from national and local economic conditions and the policies of regulatory authorities, including monetary

policies of the Board of Governors of the Federal Reserve System, which may adversely affect interest rates, interest margins, loan demand

and interest rate sensitivity;

impacts and duration of the continuing recovery from the COVID-19 pandemic and its impacts on national, regional and local economies,

supply chains, labor markets and on our customers, counterparties, employees and third-party service providers;

volatility of mortgage banking income, whether due to interest rates, demand, the fair value of mortgage loans, or other factors;

that can impact the performance of our loan portfolio, including changes in real estate values and liquidity in our primary market areas,

the financial health of our borrowers and the success of construction projects that we finance;

● the transition away from LIBOR as a reference rate for financial contracts,

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in customer account management, general ledger, deposit, loan, or other systems, including as a result of cyber-attacks;

● competitive pressures and factors among financial

services organizations could increase significantly, including product and pricing pressures, changes to third-party relationships and

our ability to recruit and retain qualified management and banking personnel;

● unexpected losses of services of our key management personnel, or the inability

to recruit and retain qualified personnel in the future;

● risks inherent in pursuing strategic growth initiatives,

including integration and other risks involved in past and possible future acquisitions;

● uncertainty regarding the nature, timing, cost

and effect of legislative or regulatory changes in the banking industry or otherwise affecting the Company, including major reform of

the regulatory oversight structure of the financial services industry and changes in laws and regulations concerning taxes, FDIC insurance

premium levels, pensions, bankruptcy, consumer protection, rent regulation and housing, financial accounting and reporting, environmental

protection, insurance, bank products and services, bank and bank holding company capital and liquidity standards, fiduciary standards,

securities and other aspects of the financial services industry;

● the effect of changes in federal, state and/or

local tax laws may adversely affect our reported financial condition or results of operations;

● the effect of changes in accounting standards,

policies and practices may adversely affect our reported financial condition or results of operations;

● litigation and regulatory compliance exposure,

including the costs and effects of any adverse developments in legal proceedings or other claims and the costs and effects of unfavorable

resolution of regulatory and other governmental examinations or inquiries;

● continued availability of earnings and dividends

from State Bank and excess capital sufficient for us to service our debt and pay dividends to our shareholders in compliance with applicable

legal and regulatory requirements;

● our ability to adapt to or comply with regulatory requirements and increasing

scrutiny and evolving expectations from customers, regulators, investors and other stakeholders with respect to the Company’s environmental,

social and governance (ESG) practices, which could affect our reputation and business and operating results;

● our ability to anticipate and successfully keep

pace with technological changes affecting the financial services industry;

● other risks identified from time to time in the

Company’s other filings with the Securities and Exchange Commission, including the risks identified under the heading “Item

Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as supplemented

Risk Factors” of Part II of this Quarterly Report on Form 10-Q.

● competitive

pressures and factors among financial services organizations could increase significantly, including product and pricing pressures, changes

to third-party relationships and our ability to recruit and retain qualified management and banking personnel;

losses of services of our key management personnel, or the inability to recruit and retain qualified personnel in the future;

inherent in pursuing strategic growth initiatives, including integration and other risks involved in past and possible future acquisitions;

● uncertainty

regarding the nature, timing, cost and effect of legislative or regulatory changes in the banking industry or otherwise affecting the

Company, including major reform of the regulatory oversight structure of the financial services industry and changes in laws and regulations

concerning taxes, FDIC insurance premium levels, pensions, bankruptcy, consumer protection, rent regulation and housing, financial accounting

and reporting, environmental protection, insurance, bank products and services, bank and bank holding company capital and liquidity standards,

fiduciary standards, securities and other aspects of the financial services industry;

effect of changes in federal, state and/or local tax laws may adversely affect our reported financial condition or results of operations;

effect of changes in accounting standards, policies and practices may adversely affect our reported financial condition or results of

and regulatory compliance exposure, including the costs and effects of any adverse developments in legal proceedings or other claims

and the costs and effects of unfavorable resolution of regulatory and other governmental examinations or inquiries;

availability of earnings and dividends from State Bank and excess capital sufficient for us to service our debt and pay dividends to

our shareholders in compliance with applicable legal and regulatory requirements;

ability to adapt to or comply with regulatory requirements and increasing scrutiny and evolving expectations from customers, regulators,

investors and other stakeholders with respect to the Company’s environmental, social and governance (ESG) practices, which could

affect our reputation and business and operating results;

ability to anticipate and successfully keep pace with technological changes affecting the financial services industry;

risks identified from time to time in the Company’s other filings with the Securities and Exchange Commission, including the risks

identified under the heading “Item 1A.

Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the

fiscal year ended December 31, 2022, as supplemented by “Item IA.

Risk Factors” of Part II of the Company’s Quarterly

Report on Form 10-Q for the fiscal quarter ended March 31, 2023, and by “Item 1A.

Risk Factors” of Part II of this Quarterly

Report on Form 10-Q.

Undue reliance should

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that could adversely impact earnings for future periods.

Three Months Ended March 31, 2023

compared to Three Months Ended March 31, 2022

for the first quarter of 2023 was $2.5 million compared to net income of $2.8 million for the first quarter of 2022, a decrease of 12.9

Diluted earnings per share (“DEPS”) of $0.35 were down 12.5 percent from DEPS of $0.40 for the first quarter of 2022.

Net income for the first quarter of 2023 was positively impacted by the Company’s recapture of temporary impairment of $0.06 million

on its mortgage servicing rights, while net income for the 2022 first quarter was positively impacted by a recapture of mortgage servicing

rights of $0.89 million.

Net income for the first quarter of 2023 was negatively impacted by the significant decline in mortgage loan

volume and loan sales, as compared to the same period in 2022, as rising rates have nearly eliminated all refinance activity and continued

compression of available housing inventory has constrained new purchase volume.

Mortgage loan volume was down over 49 percent during the

first quarter of 2023, and a lower percentage of originated volume was sold on the secondary market, as compared to the same period in

Significantly higher funding costs in 2023 have compressed net interest income from the run rate experienced in the second half

Three Months Ended June 30, 2023

compared to Three Months Ended June 30, 2022

for the second quarter of 2023 was $3.1 million compared to net income of $2.8 million for the second quarter of 2022, an increase of

Diluted earnings per share (“DEPS”) of $0.44 were up 10.0 percent from DEPS of $0.40 for the second quarter of

Net income for the second quarter of 2023 was positively impacted by higher loan income, which was offset by significantly higher

interest expense cost on deposits and wholesale borrowings.

Mortgage loan volume was down over 31 percent compared to the prior year second

quarter, but originations were up when compared to the first quarter of 2023.

Provision for Credit Losses:

first quarter provision for credit losses was $0.25 million as compared to no ($0) provision for the prior year quarter.

second quarter provision for credit losses was $0.15 million as compared to no ($0) provision for the prior year quarter.

Net charge-offs

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The Company adopted ASC 326 on

January 1, 2023, which increased the allowance for credit losses by $1.4 million.

Asset Quality Review – For the Period Ended

January 1, 2023, which increased the allowance for credit losses (“ACL”) by $1.4 million.

Quality Review – For the Period Ended

($ in thousands)

Net charge-offs – QTD

Net charge-offs – QTD/YTD

Nonaccruing loans

Modified Loans for borrowers with difficulties

Nonaccruing and modified loans

OREO / Other Assets Owned (OAO)

OREO / Other Assets Owned

Nonperforming assets

Nonperforming assets/Total assets

Allowance for credit losses/Total loans

Allowance for credit losses/Nonperforming loans

Nonperforming assets/Total

Allowance for credit losses/Total

Allowance for credit losses/Nonperforming

Consolidated Revenue:

Total revenue,

consisting of net interest income and noninterest income, was $14.0 million for the first quarter of 2023, a decrease of $0.3 million,

or 2.0 percent, from the $14.3 million generated during the first quarter of 2022.

consisting of net interest income and noninterest income, was $14.2 million for the second quarter of 2023, a decrease of $0.1 million,

or 0.5 percent, from the $14.3 million generated during the second quarter of 2022.

Net interest income (“NII”) for the

first quarter of 2023 was $10.3 million, which was up $1.8 million from the prior year first quarter’s $8.5 million.

Comparing the

first quarter of 2023 to the prior year first quarter, the Company’s earning assets decreased $38.2 million, but the average yield

on earning assets increased by 153 basis points.

The net interest margin for the first quarter of 2023 was 3.35 percent compared to 2.67

percent for the first quarter of 2022.

second quarter of 2023 was $9.8 million, which was up $0.2 million from the prior year second quarter’s $9.6 million.

the second quarter of 2023 to the prior year second quarter, the Company’s earning assets increased $32.7 million, and the average

yield on earning assets increased by 116 basis points.

The net interest margin for the second quarter of 2023 was 3.15 percent compared

to 3.16 percent for the second quarter of 2022.

Funding costs (interest paid to consumers and other entities) for interest bearing liabilities

for the first quarter of 2023 were 1.46 percent compared to 0.39 percent for the prior year first quarter.

The mix in earning assets moved

into loans compared to the prior year as that percentage of earning assets improved to 79 percent from 66 percent in the prior year.

for the second quarter of 2023 were 1.90 percent compared to 0.39 percent for the prior year second quarter.

The increase in funding costs

has been driven by the rapid increase in the Federal Funds borrowing rate and the increased competition among banks for funding sources.

Noninterest income was $4.4 million for the second

quarter of 2023, which was down $0.3 million from the prior year second quarter’s $4.7 million.

In addition to the mortgage revenue

detailed below, wealth management revenue was $0.9 million for the second quarter of 2023.

Impairment of our mortgage servicing rights

decreased noninterest income by $0.02 million in the quarter, compared to a recapture of $0.2 million in the prior year second quarter.

Our title agency contributed revenue of $0.5 million in the second quarter of 2023, down $0.2 million from the prior year.

income as a percentage of average assets for the second quarter of 2023 was 1.30 percent compared to 1.43 percent for the prior year first

State Bank originated $65.4 million of mortgage

loans during the second quarter of 2023, of which $47.9 million was sold with the remainder of loans held for investment.

This compares

to $95.4 million originated for the second quarter of 2022, of which $49.9 million was sold with the remainder of loans held for investment.

These second quarter 2023 originations and subsequent sales resulted in $1.1 million of gains, down $0.1 million from the gains for the

second quarter of 2022.

Net mortgage banking revenue was $1.6 million for the second quarter of 2023 compared to $1.8 million for the

second quarter of 2022.

The economic headwinds of higher interest rates and limited housing supply in our markets has kept overall production

down below historical levels.

Consolidated Noninterest Expense:

Noninterest expense for the second quarter of 2023 was $10.3 million, which was down $0.5 million compared to $10.8 million in the prior-year

second quarter.

Overall head count is down from the prior year quarter by 5.2 percent as we continue to right size the mortgage business

Commission expense for both mortgage and Small Business Administration (“SBA”) is down compared to the prior year due

to the lower total origination volume.

Income Taxes:

for the second quarter of 2023 were $0.6 million (effective rate of 17.0 percent) compared to $0.6 million (effective rate of 18.2 percent)

for the second quarter of 2022.

Six Months Ended June 30, 2023

compared to Six Months Ended June 30, 2022

for the first six months of 2023 was $5.5 million compared to net income of $5.6 million for the prior six months of 2022, a decrease

of 2.2 percent.

Diluted earnings per share (“DEPS”) of $0.79 were equal to the DEPS of $0.79 for the first six months of 2022.

Net income for the first six months of 2023 was positively impacted by the Company’s recapture of temporary impairment of $0.04

million on its mortgage servicing rights, while net income for the 2022 first six months was positively impacted by a recapture of mortgage

servicing rights of $1.13 million.

Mortgage loan volume was down over 40 percent during the first six months of 2023, and a lower percentage

of originated volume was sold on the secondary market, as compared to the same period in 2022.

Sales volume has been impacted by a lower

percentage of saleable originated product produced for the first six months of 2023.

Funding costs for the first six months of 2023 are up nearly 400 percent as compared to the prior year first

Provision for Credit Losses:

first six months of 2023 provision for credit losses was $0.4 million as compared to no ($0) provision for the prior year first six months.

Net charge-offs for the current year were $83,000 compared to net charge-offs of $4,000 for the year-ago first six months.

Consolidated Revenue:

Total revenue,

consisting of net interest income and noninterest income, was $28.2 million for the first six months of 2023, a decrease of $0.4 million,

or 1.3 percent, from the $28.5 million generated during the first six months of 2022.

Net interest income (“NII”) for the

first six months of 2023 was $20.2 million, which was up $2.1 million from the prior year first six months $18.1 million.

The net interest

margin for the first six months of 2023 was 3.24 percent compared to 2.91 percent for the first six months of 2022 as the yield on earnings

assets increased at a larger pace than funding costs.

Funding costs (interest paid to consumers and other entities) for interest bearing

liabilities for the first six months of 2023 were 1.69 percent compared to 0.38 percent for the prior year first six months.

Noninterest income was $8.0 million for the first

quarter of 2023, which was down $2.1 million from the prior year first quarter’s $5.8 million.

six months of 2023, which was down $2.4 million from the prior year first six months $10.5 million.

In addition to the mortgage revenue

detailed below, wealth management revenue was $0.9 million for the first quarter of 2023.

Recapture of our mortgage servicing rights impairment

increased noninterest income by $0.06 million in the quarter.

Our title agency contributed revenue of $0.4 million in the first quarter

of 2023, down $0.2 million from the prior year.

Noninterest income as a percentage of average assets for the first quarter of 2023 was

1.10 percent compared to 1.72 percent for the prior year first quarter.

detailed below, recapture of our mortgage servicing rights impairment increased noninterest income in the prior year first six months

by over $1.2 million compared to the 2023 first six months.

Our title agency contributed revenue of $0.8 million in the first six months

of 2023, down $0.5 million from the prior year first six months level of $1.3 million.

State Bank originated $114.8 million of mortgage

loans during the first quarter of 2023, of which $25.8 million was sold with the remainder of loans held for investment.

loans during the first six months of 2023, of which $73.7 million was sold with the remainder of loans held for investment.

This compares

to $97.4 million originated for the first quarter of 2022, of which $72.2 million was sold with the remainder of loans held for investment.

These first quarter 2023 originations and subsequent sales resulted in $0.6 million of gains, down $1.1 million from the gains for the

first quarter of 2022.

Net mortgage banking revenue was $1.2 million for the first quarter of 2023 compared to $2.9 million for the first

quarter of 2022.

The 2023 first quarter included a recapture of our mortgage servicing rights impairment of $0.06 million compared to

a $0.89 million recapture for the first quarter of 2022.

to $192.8 million originated for the first six months of 2022, of which $122.1 million was sold with the remainder of loans held for investment.

These 2023 year-to-date originations and subsequent sales resulted in $1.7 million of gains, down $1.2 million from the $2.9 million in

gains for the first six months of 2022.

Net mortgage banking revenue was $2.8 million for the first six months of 2023 compared to $4.7

million for the first six months of 2022.

Consolidated Noninterest Expense:

Noninterest expense for the first quarter of 2023 was $10.8 million, which was down $0.1 million compared to $10.9 million in the prior-year

first quarter.

Overall head count is down from the linked quarter by 4.9 percent as we continue to right size the mortgage business line.

Commission expense for both mortgage and SBA is down compared to the prior year due to the lower total origination volume.

Noninterest expense for the first six months of 2023 was $21.1 million, which was down $0.6 million compared to $21.7 million in the prior-year

first six months.

Commission and benefit expense is down compared to the prior year due to lower staffing levels and compressed volume

in Residential Mortgage and SBA.

Income Taxes:

for the first quarter of 2023 were $0.5 million (effective rate of 17.4 percent) compared to $0.6 million (effective rate of 17.7 percent)

for the first quarter of 2022.

taxes for the first six months of 2023 were $1.1 million (effective rate of 17.2 percent) compared to $1.2 million (effective rate of

18.0 percent) for the first six months of 2022.

Changes in Financial Condition

Total assets at March 31, 2023 were $1.34 billion,

Total assets at June 30, 2023 were $1.34 billion,

an increase of $5.7 million, or 0.4 percent, since December 31, 2022.

Total loans, net of unearned income, were $976.3 million as of March

Total loans, net of unearned income, were $984.8 million as of June

30, 2023, up $22.7 million, or 2.4 percent, from year-end.

The final PPP loan that was originated by the Company was forgiven in the quarter.

Total deposits at March 31, 2023 were $1.11 billion,

an increase of $23.4 million, or 2.2 percent, since 2022 year end.

The Company had approximately $121.1 million and $154.5 million of

uninsured deposits as of March 31, 2023 and December 31, 2022, respectively.

Uninsured deposit amounts are estimated based on the portions

of customer account balances that exceed the FDIC insurance limit of $250,000.

Total deposits at June 30, 2023 were $1.07 billion,

a decrease of $15.5 million, or 1.4 percent, since 2022 year end.

The Company had approximately $160.0 million and $220.1 million of uninsured

deposits as of June 30, 2023 and December 31, 2022, respectively.

Uninsured deposit amounts are estimated based on the portions of customer

account balances that exceed the FDIC insurance limit of $250,000.

Borrowed funds (consisting of FHLB advances, repurchase

(“REPO”) agreements, trust preferred securities and subordinated debt) totaled $90.4 million at March 31, 2023.

from year-end 2022 when borrowed funds totaled $104.8 million due to repayment of FHLB advances during the quarter ended March 31, 2023.

Total equity for the Company of $119.8 million now stands at 8.9 percent of total assets compared to the December 31, 2022 level of $118.4

million and 8.9 percent of total assets.

Improvement in the unrealized loss of available for sale securities was primarily offset by the

adjustments for the adoption of CECL.

(“REPO”) agreements, trust preferred securities and subordinated debt) totaled $132.3 million at June 30, 2023.

from year-end 2022 when borrowed funds totaled $104.8 million due to higher levels of FHLB advances due to the decline in deposits noted

Total equity for the Company of $117.7 million now stands at 8.8 percent of total assets compared to the December 31, 2022, level

of $118.4 million and 8.9 percent of total assets.

Adjusting for the temporary impairment of Accumulated Other Comprehensive Loss, total

equity would increase to $150.6 million or 11.2% of total assets.

The allowance for credit losses of $15.8 million

is up $1.6 million from the December 2022 year-end level due to adding $1.4 million for the adoption of CECL and the quarterly provision

net of charge-offs.

The Company continues to have stable asset quality with the non-performing asset ratio at 35 basis points and coverage

on non-performing loans at 382 percent.

is up $2.0 million from the December 2022 year-end level due to adding $1.4 million for the adoption of CECL $0.6 million for the first

six months of provision net of charge-offs.

The Company has had improving asset quality through the first six months of 2023 with the

non-performing asset ratio at 26 basis points and coverage on non-performing loans at 543 percent.

Other liabilities are down $6.5 million from December

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Capital Resources

As of March 31, 2023, based on the computations for the FFIEC 041 Consolidated

Reports of Condition and Income filed by State Bank with the Federal Reserve Board, State Bank was classified as “well capitalized”

under the regulatory framework for prompt corrective action.

To be categorized as well capitalized, State Bank must maintain capital ratios

as set forth in the table below.

There are no conditions or events since March 31, 2023 that management believes have changed State Bank’s

capital classification.

The Company adopted CECL on January 1, 2023 which reduced capital levels by $2.0 million.

The Company elected

to not phase in the impact of CECL as the reduction in capital did not have a material impact to tangible and regulatory capital levels.

As of June 30, 2023, based on the computations

for the FFIEC 041 Consolidated Reports of Condition and Income filed by State Bank with the Federal Reserve Board, State Bank was classified

as “well capitalized” under the regulatory framework for prompt corrective action.

To be categorized as well capitalized,

State Bank must maintain capital ratios as set forth in the table below.

There are no conditions or events since June 30, 2023 that management

believes have changed State Bank’s capital classification.

The Company adopted CECL on January 1, 2023, which reduced capital levels

by $2.0 million.

The Company elected to not phase in the impact of CECL as the reduction in capital did not have a material impact to

tangible and regulatory capital levels.

State Bank’s actual capital levels

and ratios as of March 31, 2023 and December 31, 2022 are presented in the following table.

and ratios as of June 30, 2023 and December 31, 2022 are presented in the following table.

Capital levels are presented for State Bank

1 unchanged sentence

Capitalized Under

Adequacy Purposes

For Capital Adequacy

Prompt Corrective

1 unchanged sentence

($ in thousands)

As of March 31, 2023

As of June 30, 2023

Tier I Capital to average assets

8 unchanged sentences

Regulatory capital requirements commonly

referred to as “Basel III” were fully phased in as of January 1, 2019 and are reflected in the March 31, 2023 capital table

referred to as “Basel III” were fully phased in as of January 1, 2019 and are reflected in the June 30, 2023 capital table

Management opted out of the accumulated other comprehensive income treatment under the new requirements and, as such, unrealized

7 unchanged sentences

Liquid assets totaled $255.9

million at March 31, 2023, compared to $270.8 million at December 31, 2022.

million at June 30, 2023, compared to $270.8 million at December 31, 2022.

Liquidity risk arises from the possibility

8 unchanged sentences

The Company’s commercial real

estate, first mortgage residential, agricultural and multi-family mortgage portfolio of $786.5 million at March 31, 2023 and $730.9 million

estate, first mortgage residential, agricultural and multi-family mortgage portfolio of $797.0 million at June 30, 2023 and $730.9 million

at December 31, 2022, which can and has been used to collateralize borrowings, is an additional source of liquidity.

1 unchanged sentence

the Company’s current liquidity level, without these borrowings, is sufficient to meet its liquidity needs.

At March 31, 2023, all

At June 30, 2023, all

eligible commercial real estate, first mortgage residential and multi-family mortgage loans were pledged under an FHLB blanket lien.

2 unchanged sentences

to maintain an adequate level of liquidity.

A discussion of the cash flow statements for the three months ended March 31, 2023 and 2022

A discussion of the cash flow statements for the six months ended June 30, 2023 and 2022 follows.

The Company experienced negative cash

flows from operating activities for the three months ended March 31, 2023 and March 31, 2022.

Net cash used by operating activities was

$4.1 million for the three months ended March 31, 2023 and $1.5 million for the three months ended March 31, 2022.

Highlights for the

current year include $25.8 million in proceeds from the sale of loans, which is down $48.1 million from the prior year.

Originations of

loans held for sale was a use of cash of $29.0 million, which is down from the prior year by $41.1 million.

For the three months ended

March 31, 2023, there was a gain on sale of loans of $.6 million, and depreciation and amortization of $.5 million.

flows from operating activities for the six months ended June 30, 2023 and positive cash flows for the six months ended June 30, 2022.

Net cash used by operating activities was $0.9 million for the six months ended June 30, 2023 and net cash provided by operating activities

was $3.7 million for the six months ended June 30, 2022.

Highlights for the current year include $73.7 million in proceeds from the sale

of loans, which is down $51.3 million from the prior year.

Originations of loans held for sale was a use of cash of $76.3 million, which

is down from the prior year by $43.6 million.

For the six months ended June 30, 2023, there was a gain on sale of loans of $1.9 million,

and depreciation and amortization on premises and equipment of $1.1 million.

The Company experienced negative cash

flows from investing activities for the three months ended March 31, 2023 and March 31, 2022.

flows from investing activities for the six months ended June 30, 2023 and June 30, 2022.

Net cash used in investing activities was $14.0

$9.4 million for the three months ended March 31, 2023 and $43.3 million for the three months ended March 31, 2022.

Highlights for the

current year include an increase of $14.3 million in loans, which is down $13.7 million from the prior year three-month period.

cash payments were offset by $4.9 million in proceeds from maturities and sales of securities, which is down $8.4 million from the prior

year three-month period.

million for the six months ended June 30, 2023 and $111.3 million for the six months ended June 30, 2022.

Highlights for the current year

include an increase of $22.9 million in loans, which is down $50.2 million from the prior year six-month period.

These cash payments were

offset by $10.3 million in proceeds from maturities and sales of securities, which is down $11.1 million from the prior year six-month

The Company experienced positive cash

flows from financing activities for the three months ended March 31, 2023 and March 31, 2022.

Net cash provided by financing activities

was $7.3 million and $25.3 million for the three months ended March 31, 2023 and March 31, 2022, respectively.

Highlights for the current

period include a $19.9 million decrease in transaction deposits and a $43.4 million increase in time deposits for the three months ended

March 31, 2023.

This compares to the prior year three-month period where transaction deposits increased by $33.0 million and time deposits

decreased by $8.0 million.

Net repayments of Federal Home Loan Bank advances for the three months ended March 31, 2023 were $15.5 million,

compared to no activity for the prior year three-month period.

ALCO uses an economic value of equity

(“EVE”) analysis to measure risk in the balance sheet incorporating all cash flows over the estimated remaining life of all

balance sheet positions.

Computations of prospective effects of hypothetical interest rate changes are based on an internally generated

model using actual maturity and repricing schedules for the Bank’s loans and deposits, and are based on numerous assumptions, including

relative levels of market interest rates, loan repayments and deposit run-offs, and should not be relied upon as indicative of actual

Further, the computations do not contemplate any actions the Bank may undertake in response to changes in interest rates.

Management cannot accurately predict

future interest rates or their effect on the Bank’s EVE in the future.

Certain shortcomings are inherent in the method of analysis

presented in the computation of EVE.

For example, although certain assets and liabilities may have similar maturities or periods to repricing,

they may react in differing degrees to changes in market interest rates.

Additionally, certain assets, such as adjustable-rate loans,

have an initial fixed rate period typically from one to seven years and over the remaining life of the asset changes in the interest rate

are restricted.

In addition, the proportion of adjustable-rate loans in the Bank’s portfolios could decrease in future periods due

to refinancing activity if market interest rates remain steady in the future.

Further, in the event of a change in interest rates, prepayment

and early withdrawal levels could deviate significantly from those assumed in the table.

Finally, the ability of many borrowers to service

their adjustable-rate debt may decrease in the event of an interest rate increase.

The EVE analysis calculates the net present value of the Company’s

assets and liabilities in rate shock environments that range from -400 basis points to +200 basis points.

The results are reflected in

the following tables for March 31, 2023 and December 31, 2022.

Value of Equity

March 31, 2023

($ in thousands)

Change in rates

+200 basis points

+100 basis points

-100 basis points

-200 basis points

-300 basis points

-400 basis points

Economic Value of Equity

December 31, 2022

($ in thousands)

Change in rates

+400 basis points

+300 basis points

+200 basis points

+100 basis points

-100 basis points

-200 basis points

-300 basis points

-400 basis points

flows from financing activities for the six months ended June 30, 2023 and negative cash flows from financing activities for the six months

ended June 30, 2022.

Net cash provided by financing activities was $8.1 million for the six months ended June 30, 2023 and net cash used

in financing activities was $12.3 million for the six months ended June 30, 2022.

Highlights for the current period include a $64.3 million

decrease in transaction deposits and a $48.8 million increase in time deposits for the six months ended June 30, 2023.

This compares to

the prior year six-month period where transaction deposits decreased by $27.0 million and time deposits decreased by $14.2 million.

proceeds of Federal Home Loan Bank advances for the six months ended June 30, 2023 were $21.3 million, compared to $19.5 million for the

prior year six-month period.

Off-Balance-Sheet Borrowing Arrangements:

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commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolios in the total amount of $797.0 million

were pledged to meet FHLB collateralization requirements as of March 31, 2023.

Based on the current collateralization requirements of

the FHLB, the Company had approximately $109.2 million of additional borrowing capacity at March 31, 2023.

The Company also had $152.3

million in unpledged securities available to pledge for additional borrowings.

were pledged to meet FHLB collateralization requirements as of June 30, 2023.

Based on the current collateralization requirements of the

FHLB, the Company had approximately $91.5 million of additional borrowing capacity at June 30, 2023.

The Company also had $150.1 million

in unpledged securities available to pledge for additional borrowings.

The Company has contractual obligations consisting

of long-term debt obligations and operating lease obligations.

In addition, as of March 31, 2023, the Company had commitments to sell

mortgage loans totaling $13.8 million.

The Company believes that it has adequate resources to fund commitments as they arise and that

it can adjust the rate on savings and time deposits to retain deposits in changing interest rate environments.

If the Company requires

funds beyond its internal funding capabilities, advances from the FHLB of Cincinnati and other financial institutions are available.

In addition, as of June 30, 2023, the Company had commitments to sell mortgage

loans totaling $11.8 million.

The Company believes that it has adequate resources to fund commitments as they arise and that it can adjust

the rate on savings and time deposits to retain deposits in changing interest rate environments.

If the Company requires funds beyond

its internal funding capabilities, advances from the FHLB of Cincinnati and other financial institutions are available.

Asset Liability Management

77 unchanged sentences

financial instruments.

Quantitative and Qualitative Disclosures about Market Risk

Quantitative and Qualitative

Disclosures about Market Risk

Management believes there has been no

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis